Predictions galore

15 August 2005

The nuclear power industry has drawn encouragement from recent energy projections such as the International Energy Agency's "World Energy Outlook 2004". Here we look at a number of energy outlook reports and ask whether they really do predict a bright nuclear future.

Is it simply anti-nuclear propaganda when a Green-commissioned report shows that the nuclear industry is in worldwide decline (see article on page 36), while other outlooks are apparently predicting that the industry will grow? With so many energy outlooks available from a large variety of sources, is it the case that we can just choose to believe the report that gives us the scenario we like the sound of?

Here, we take a look at several recent reports to see if there is a general consensus on the future prospects for nuclear power. During this discussion it is worth remembering that projections can change considerably from year to year – as pointed out in last year’s article focusing on the US Energy Information Administration’s International Energy

Outlook 2004 (see NEI June 2004, p33) – and that such projections are more of a reflection of the present than a factual record of how energy will be produced in a particular year in the future. In other words, energy projections tend to be based on recent trends – which of course tend to change as time goes by.

World Energy Outlook

Soon after the International Energy Agency (IEA) released its World Energy Outlook 2004 (WEO 2004), NucNet ran the headline: “IEA Outlook Predicts Slight Growth For Nuclear.” On the other hand, The World Nuclear Industry Status Report 2004 states: “The 2004 edition of the World Energy Outlook still assumes that nuclear power ‘will decline progressively’.”

To put both these apparently contradictory views in context, WEO 2004 states: “The role of nuclear power will decline progressively over the Outlook period. The rate of construction of new reactors is expected to keep pace with the rate at which old reactors are retired. This is both because nuclear power will have trouble competing with other technologies and because many countries have restrictions on new construction or policies to phase out nuclear power. As a result, nuclear production will peak soon after 2010 and then decline gradually.” Even so, in terms of its share of world primary energy, nuclear power would fall from its current 7% to 6% in 2010 and to 5% by 2030.

In terms of installed capacity, WEO 2004 predicts 376GWe of installed nuclear capacity worldwide by 2030 – an increase on the 2002 figure of 359GWe. The report states: “New nuclear plants with combined capacity of 150GWe are expected to be built around the world, the largest number in OECD Europe. However, most of this capacity will replace older reactors in France, the only OECD country so far that anticipates such a large-scale replacement of its nuclear base before 2030.”

In China, South Korea Japan and India, nuclear capacity is expected to increase, as will its share in electricity generation. Although there is a predicted increase in Asia, nuclear output is projected to fall in Europe. In North America, nuclear capacity is expected to increase in the near term and then fall back to its current level by 2030. The outlook expects nuclear capacity to increase in Russia but to decline in the other transition economies.

The projections for Europe are of greatest concern for the nuclear industry. Despite a slight growth rate in overall primary energy demand in the European Union (EU) of 0.7% per year over 2002-2030, nuclear is predicted to decline by an average of 1.9% per year during this period. Installed nuclear capacity in the EU would accordingly fall from 133GWe in 2002, through 124GWe in 2010 and 93GWe in 2020, to only 71GWe in 2030 – a sharp drop in primary energy share from 15% in 2002 to 7% in 2030.

That said, the report also includes the obvious caveat that possible changes in government policies and public attitudes could lead to nuclear power playing a much more important role than projected.

IAEA projections

The ‘business as usual’ case in WEO 2004 is therefore not the best outcome for the nuclear industry as a whole. Though The World Nuclear Industry Status Report 2004 could be rejected by the nuclear industry on the grounds that it has an anti-nuclear agenda, the same argument cannot be used for WEO 2004. Another respected source – as far as the nuclear industry is concerned – is the International Atomic Energy Agency (IAEA). Its latest annual Reference Data Series No. 1 report – titled Energy, Electricity and Nuclear Power Estimates for the Period up to 2030 – gives projections up to 2030, so a direct comparison can be made here.

The IAEA reports that there was 361.9GWe of nuclear generating capacity – a 10% share of total installed capacity – in 2003. This is projected to rise to between 396GWe (low estimate) and 408GWe (high estimate) in 2010, still with a 10% share. By 2020 installed nuclear capacity would increase to between 427GWe and 512GWe under the IAEA’s scenario. By 2030 the difference in installed capacity between the low and high estimates is considerably large, though the share of the total

generation is almost equal in both estimates, at 8.3% and 8.4%, respectively. Even with reactor closures taken into account, the IAEA estimates that there could be of the order of between 423GWe and 592GWe in 2030.

On the one hand, WEO 2004 predicts that nuclear capacity will grow at an average at 0.2% per year; on the other, the IAEA predicts worldwide average nuclear capacity growth of between 1.0% and 2.1% per year. More importantly, the WEO 2004 average is made up of an initial increase to 2010, followed by a decrease thereafter; the IAEA predicts a continuous increase throughout the period.

The introduction to Energy, Electricity and Nuclear Power Estimates points out: “These estimates should be viewed as very general growth trends whose validity must constantly be subjected to critical review.

“The energy forecasts carried out in increasing numbers over the last years by international, national and private organizations are based on a multiplicity of different assumptions and different aggregating procedures, which make their comparison and synthesis very difficult.”

Clearly, that is the case here.

An alternative scenario

A clue to why there are significant differences between the IAEA and IEA projections lies in the acknowledgement that business cannot continue as usual. Many in the nuclear industry (and increasing numbers outside of it) are convinced there will be no choice other than to ensure that nuclear is an important part of a future energy mix. If one assumes that concerns over both carbon dioxide emissions and security of supply remain high priorities, then this conclusion is inevitable.

Turning back to WEO 2004, this is the first WEO report to present an alternative policy scenario that covers all world regions. In this scenario, countries adopt a set of new policies and measures to tackle environmental problems and enhance energy security: “More efficient use of energy in a wide range of applications, including vehicles, electric appliances, lighting and industrial uses, account for almost 60% of the reduction in CO2 emissions. A shift in the fuel mix for power generation in favour of renewables and nuclear energy power accounts for most of the rest.”

The alternative scenario predicts 428GWe nuclear capacity in 2030, some 50GWe more than in the reference scenario. Overall, nuclear power production is 14% higher. But, unlike the reference case, the alternative one also predicts that world energy demand for nuclear power will continue to increase – from 692Mtoe in 2002 (18% share of total generation), through 816Mtoe in 2020 (16% share) and 868Mtoe in 2030 (15% share).

And there is further cause for optimism for the nuclear industry. Noting that spending on developing new reactor designs and technology improvements for all major reactor types is estimated at over $1.5 billion per year, the report states: “If any of the technologies being developed becomes economically competitive during the projection period and if proliferation, waste and safety issues are adequately addressed, nuclear power could play a much bigger role in power generation than it is assigned in either of our scenarios. In this case, global CO2 emissions could be much lower.”

Future costs

Another area that could also impact on future decisions is outlined in Projected Costs of Generating Electricity, by the Nuclear Energy Agency (NEA) and the IEA. The principal stumbling block to nuclear build is arguably cost, and past experience demonstrates that investments in a new nuclear plant are, on the whole, high risk. However, nuclear is now proving itself to be an economic option – and as more governments and investors become convinced of this, projections of future nuclear capacity will rise.

In the 2005 Update of the joint NEA and IEA study, overnight construction costs (not including refurbishment or decommissioning) for nuclear plants vary between $1000 and $2000 per kWe for most plants. Total levelised investment costs (which include decommissioning, refurbishment and interest during construction costs) range between $21/MWh and $31/MWh for a 5% discount rate, and $30-50/MWh at 10%.

In the study, ten countries provided cost data for coal and nuclear plants, and ten countries data for gas and nuclear. At the 5% discount rate, nuclear is cheaper than coal with a margin of 10% or more in seven countries, and cheaper than gas in nine countries. In one case (the USA) coal is cheaper than nuclear by a margin of 10% or more, while gas is never cheaper than nuclear by this margin. At the 10% rate nuclear still remains the most attractive option.

On the surface, if these results are to be taken at face value then the nuclear industry can sit back and watch the orders flow in. But the report explains why the WEO 2004 projections favour gas as the fuel of choice for the future: “With its short construction time, modularity and low capital commitment, CCGT has been a preferred technology in many markets due to its flexibility. The factors that determine the value of flexibility are not adequately reflected in the levelised lifetime cost methodology.” Therefore, the Projected Costs of Generating Electricity study “does not signal that we are about to see a significant change to this global trend of ‘gas-to-power’.”

Of course, gas is not always the least-risk option, as the report also points out: “Technologies with low marginal production costs, such as nuclear, may in such cases offer a guarantee of long-term price stability which is not provided by technologies such as CCGT gas-fired plants with high fuel cost related marginal costs of production.”

The investors’ views

It is also advisable to keep a close eye on the opinions within the world of finance – after all, no bank would help finance a new nuclear plant if its analysts were to have little confidence in nuclear’s future prospects. At the end of 2004, Deutsche Bank Research (DBR) published its Energy prospects after the petroleum age report, which many in the nuclear industry drew encouragement from.

It is interesting to note the degree of emphasis placed on risk in the report – something that investors are not keen on. Citing the recent surges in the price of oil, and power outages in North America and Europe, the report claims this demonstrates an “urgent need for a renaissance in energy policy targeting secure supply.”

The DBR study states: “The scarcity of fossil sources of energy looming in the longer term makes it necessary to seek alternatives. To guarantee supply security and conserve fossil-based resources, a mixture of renewable and/or non-exhaustible sources of energy would be ideal.”

The latter includes nuclear, which is of particular significance in this report as the primary focus is on Germany, which has a nuclear phase-out policy. Although the share of nuclear energy worldwide is expected to decline, the report states: “Technological progress could brighten the prospects for nuclear energy. Further advances in plant security and the disposal of nuclear waste would be helpful here.” It goes on to say: “If, moving ahead, a further generation of nuclear power stations can be developed and brought online, this may enhance the security of energy supply in Germany.”

The general adversity to risk and uncertainty in the DBS report is echoed in the latest annual global utilities survey carried out by Pricewaterhouse Coopers (PwC), titled Under pressure. This report finds it is regulatory uncertainty that is holding back the investment needed to secure power supply. In the period to 2030, some $12.7 trillion needs to be invested in power generation, transmission and distribution and gas-supply infrastructure, according to the report. However, the utilities “are striving to make their sector attractive to investors while grappling with regulatory uncertainty and market volatility that creates an investment hurdle.”

Against the background of worries about security of supply, transmission capacity and the encouragement of renewable energy, amongst others, “more than half of utility respondents (52%) believe concerns about climate change will lead to a growth in nuclear power generation capacity in their region. In Europe, 66% of those surveyed expected a nuclear revival.

A clear picture

Outlook studies, such as the ones covered here are clearly of importance to the energy industry and policymakers. When studied in the right context, much useful information can be taken from them. However, those industries – such as the nuclear industry – that show most interest in such studies also play a crucial role in their accuracy. WEO 2004 states: “There is an urgent need to preserve the reliability of our statistical base,” which it says is becoming increasingly difficult. The report points out that breaks in time-series and missing data that have become frequent in some countries “could seriously affect any type of analysis, including modelling and forecasting.” NEI couldn’t agree more: as the power industry as a whole becomes increasingly reluctant to provide generation data – and in our experience nuclear is one of the biggest culprits – those statistics that rely on the provision of this data, and which are of so much interest and importance to the industry, are being undermined.

Returning to the main subject, outlook reports, as stated earlier, tend to reflect the present situation despite the fact that they apparently predict future scenarios. It is only when they factor in the changes likely to happen in the future that we get a clearer idea of where we are heading. WEO 2004, for example, does this in its alternative scenario, where the projected scenarios then fall more into line with those predicted by financial analysts – who are after all more concerned with the most likely picture of the future, rather than with the extrapolation of business-as-usual scenarios. So, from this analysis, one could conclude that, although it could be shown that nuclear is currently heading for decline, the future climate (pun intended) will change so as to give renewed hope for the nuclear industry.

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